One thing's for sure: S&P's Friday-night decision to deliver the first credit downgrade in U.S. history was all about politics.
The question is: Whose politics? All parties came away from the report with a story to tell ... which happened to be the same story they had been telling for months. Republicans used the downgrade to blame the administration's deficits. Democrats used the report's demand for more revenue to knock the GOP. Meanwhile U.S. financial luminaries, from Buffett to Krugman, accused S&P of making a splashy, and unnecessary, political point about U.S. creditworthiness.
Within hours of the report, Washington had descended into exactly the kind of blame game for which S&P downgraded us in the first place.
That's why I'm slowly coming around to S&P's decision. It seems crazy to downgrade our debt just days after Treasury yields hit their year-low (U.S. debt is considered so much safer than other assets today that on Thursday, yields went negative on inflation-protected securities). It seems crazy to downgrade our debt a week after a debt ceiling deal that promises to cut more than $2 trillion in debt. It furthermore seems crazy to downgrade our debt given our stable prices, young population, and history of dependable economic vibrancy.
But having no faith in Republicans and Democrats to reach an agreement on taxes and entitlements doesn't sound crazy, at all. If anything, it sounds passe. From the report:
The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011
S&P didn't just downgrade the U.S. government's debt. They downgraded the U.S. government. They determined that the safest asset in the world is being run by a city that is addicted to creating crises to force small spending cuts, fanatical about keeping taxes low, and, to a certain extent, too resistant to cost-saving entitlement reform. Can you blame them?
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